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Mondavi Uncorks Big Gains

An offer from Constellation has shareholders seeing stars.

Shareholders in winery Robert Mondavi(NASDAQ:MOND) were cheering like F. Scott Fitzgerald at a Princeton football game yesterday. The company's shares jumped more than 30% on extraordinarily heavy volume following Constellation Brands'(NYSE:STZ)offer to buy the company at a substantial premium. (I can hear them now: "Shiraz! Shiraz! Shiraz Shiraz Shiraz!)

It wasn't hard to see this coming. Mondavi shares have been steady risers since last April. The increase has been spurred on by moves that signaled an end to close Mondavi family control, a declaration of "open for business" to potential acquirers, and some very forward-thinking, shareholder-friendly moves. Last month, for example, management announced plans for a substantial reorganization that stands to fill corporate coffers while refocusing on high-growth segments.

Not so fast, says Constellation. Shares of that company fell more than 8% yesterday after it decided it was worth paying a 37% premium for Mondavi (based on Monday's closing price) to change Mondavi management's mind about those plans. Constellation investors are likely right to question the offered (not yet accepted) price, even though their company's management believes the acquisition would boost earnings and cash flow straight away.

It likely would: After all, Mondavi's business is profitable and generally generates good cash flows. (After a return to earnings growth last fiscal year, fiscal Q1 results -- scheduled for an October 28 release -- will be watched closely.) In short, Mondavi investors have to feel pretty darn good these days.

The restructuring plan looks strategically sensible. That gives management the strength to play hardball -- as evidenced by a Monday release announcing plans to proceed with the reorganization despite an unnamed "unsolicited proposal" and Constellation's swift riposte. As seems to be the case a lot lately in the wine business, this should be interesting to watch.